What Are the Pro’s and Con’s of Refinancing a Mortgage?

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Over the last 10 years mortgage rates have consistently been at historically low levels. This resulted in a level of mortgage refinancing activity never seen before. Low rates alone, however, do not always mean refinancing is a smart option. It is important to look at your whole situation and both the pro’s and con’s of refinancing before you jump into the process of getting a new mortgage loan. Let’s take a look at some of the advantages and disadvantages of a home refinance.First, let’s examine the benefits of refinancing your mortgage loan:If you are refinancing to a rate that is significantly lower than your current loan rate, you may see a tremendous savings on your monthly payments.
If you can afford a slightly higher payment, you may be able to reduce the loan term, thereby paying off your home quicker and lowering your overall interest costs.
If you have equity in your home you can do a cashout refinance or a refinance for debt consolidation. A cashout refinance simply means taking out a larger mortgage than you currently have – and taking the difference in cash at closing. A refinance for debt consolidation is similar to a cashout refinance. Instead of putting cash in your pocket, however, you pay off other debts you may have, preferably those with higher interest rates such as credit cards.
Refinancing for debt consolidation can save you a lot of money each month if you are paying off high interest rate credit cards and do not run your credit card balances up again after paying them off.
Refinancing from an adjustable rate loan to a fixed rate mortgage can provide a welcome sense of peace of mind and stress relief.Secondly, here are some of the potential drawbacks of refinancing your mortgage:If you don’t do the proper analysis beforehand, you could easily lose money when trying to refinance. We’ll explore this in more depth below.
Many people over pay lenders and brokers by not recognizing “junk fees” that could be eliminated.
Since the onset of the housing / credit crisis in 2007 it has become nearly impossible to refinance if you don’t have good credit.
The housing / credit crisis has also made it difficult to refinance if you are self employed and not able to verify all of your income as lenders are now being more conservative with limited or low documentation loans.
Falling home values in many parts of the country have made refinancing impossible for many people since their homes are currently worth less than what is owed on the mortgage.Let’s take a look at how to avoid the potential pitfalls mentioned in items number 1 and 2 in the list of potential drawbacks listed above:It is important to do the proper analysis of your personal situation before entering into a mortgage refinance transaction. The most important thing to look at is – how long you plan on staying in your current home. In order for a refinance to truly save you money you will need to stay in your home long enough for the monthly savings to offset the costs involved in getting your new loan. As an example, let’s say that you refinance and your monthly savings is $200.00. Now, let’s assume that the transaction cost you $2,000.00. If you stay in your home for less than 10 months you will not save enough to recoup the cost of the loan transaction.It’s also important to understand all of the fees that you are being charged when getting a new loan. Many lenders will pile on extra fees in an effort to maximize their profits. These junk fees will often take the form of prepaid finance charges or an “origination fee”. A great way to keep your lender honest is to shop around and get several lenders competing with each other in order to insure that each lender or broker give you the very best offer they can. Websites like LendingTree.com and LowerMyBills.com have greatly simplified this shopping process by allowing you to fill out one form and get quotes from multiple lenders.The bottom line is that refinancing your mortgage can be a terrific way for you to save money each month if you do your homework and watch out for some of the common pitfalls.

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